House prices fell by 1.2 per cent in the past three months, according to a closely watched index, reinforcing signs that the housing market is tipping downwards.

The decline in prices in the three months to October, compared with the previous three months, is the most rapid fall since mid-2009 and comes as very few loans are being made to homebuyers compared with historic levels.

But falls in prices at the moment are less sharp at about a 5 per cent annualised pace, than the declines of nearly 25 per cent annualised in late 2008, when the housing market was at its weakest.

Halifax, the mortgage lender owned by Lloyds Banking Group and which produces the index, said that prices rose by 1.8 per cent in October, but that only partially reversed a record 3.7 per cent drop in September.

Monthly figures on house prices tend to be volatile, so the change over a three-month period is viewed as a smoother, better guide to the trend for activity in housing.

House prices in the past three months were up only 1.2 per cent compared with a year earlier, down from a 7 per cent year-on-year increase in May.

“An increase in the number of properties available for sale in recent months, together with a decline in demand, has put some downward pressure on prices in recent months,” said Martin Ellis, economist for Halifax.

“We do not believe that prices are set to fall sharply over a sustained period. Interest rates are likely to remain very low for an extended period, which will continue to support the improved mortgage affordability position for homeowners.”

However, some city economists do expect a sizeable fall in prices over the next year. Howard Archer of IHS Global Insight foresees a 10 per cent drop in prices by the end of 2011. The average independent forecast according to the Treasury is for a fall of nearly 1 per cent in 2011, with prices rising just 2 per cent this year.

The weak Halifax figures echo other housing market indicators. The other closely watched index from Nationwide is showing a 1.5 per cent decline in the past three months and is up just 1.4 per cent in the past year.

Mortgage approvals are running at less than half their pre-crisis average and far below the level which economists believe is consistent with stable or rising prices.

Meanwhile residential property professionals have told the Royal Institute for Chartered Surveyors that prices for the three months to September have fallen. Stocks of properties on agents books are rising and instructions to sell are rising.

“High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage (particularly for first-time buyers), a housing supply/demand balance currently firmly in favour of buyers and a house price/earnings ratio above long-term norms are a poor combination of factors for housing market activity and prices,” said Mr Archer.

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